The inexplicable AIG waiver

By Felix Salmon

June 30, 2010

Louise Story and Gretchen Morgenson have another huge AIG/Goldman story today, which centers on one new and interesting piece of information: when AIG paid off its bank creditors in full, with the help of that monster government bailout, it also signed a waiver forfeiting its right to sue those banks, including Goldman.
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Louise Story and Gretchen Morgenson have another huge AIG/Goldman story today, which centers on one new and interesting piece of information: when AIG paid off its bank creditors in full, with the help of that monster government bailout, it also signed a waiver forfeiting its right to sue those banks, including Goldman.

The waiver is buried on page 385 of the 823 pages of documents that the NYT has, wonderfully, put online in a very easy-to-read form. (It’s also linked to the full 250,000-page document dump from the House Committee on Oversight and Government Reform, if you want to go trawling through the documents yourself.) I was rude about the NYT putting source documents online a couple of weeks ago; this is the best possible way of the NYT proving that I was wrong.

The waiver itself is interesting. Taking out some of the legal blather, it comes down to this:

Each of AIG-FP and AIG Inc, for good and valuable consideration, the sufficiency of which it hereby acknowledges, forever releases the Counterparty from any and all Claims of any nature whatsoever that AIG-FP or AIG Inc ever had, now has or can, shall or may have, by reason of any matter, cause or thing occurring from the beginning for the world to the Termination Date that arises out of or in any way relates to the CDS Transactions.

Yes, it really says “from the beginning for the world.” But more interesting to me is the bit about “good and valuable consideration.” It seems to me that AIG paid off Goldman and its other counterparties in full — it essentially gave them everything they could possibly want. So what good and valuable consideration did Goldman give to AIG in return for this waiver? Why would AIG agree to this?

The answer of course is that it was not in AIG’s interest to agree to this waiver, and it really didn’t get much if anything in the way of good and valuable consideration from Goldman or anybody else. But the waiver was forced on AIG by the government, and specifically by Treasury and the New York Fed. Treasury was full of old Goldman hands, including Hank Paulson and Dan Jester; the Fed, too, was and is much closer to Goldman than to AIG.

The whole thing is very smelly, and I’d love to see a better reason for the waiver’s existence than this:

David Moss, the Harvard professor, said the government might have been concerned that the insurer would use taxpayer money to sue banks. “The question is: was this legitimate?” he asked. “The answer depends on the motivation. If the reason was to avoid a slew of lawsuits that could have further destabilized the financial system in the short term, this may have been reasonable.”

But the fact is that wasn’t the reason: since AIG was being nationalized, if the government wanted to avoid any lawsuits in the short term it could simply tell AIG not to sue Goldman. The point of the waiver was clearly to enjoin AIG from ever suing Goldman even after it emerged from government control. And there’s no good reason for that.